1) The property I just bought a few months ago is located in a different state than I live. As soon as I bought it, I moved my pre-owned furnishings interstate to the property in order to fully furnish it as an intermediate rental (as a 6 month+ rental lease). I don't necessarily want to depreciate the pre-owned furnishings, as I'd like to potentially use them one day again for personal use. However, I would like to claim the expense of moving these furnishings interstate to the rental property on this year's taxes. .....-- the time it took for setup of the rental and home repair work?
No. Your cost of preparing the property for rent the very first time are never deductible anywhere on your tax return. While technically/legally, you should depreciate the furnishings, I wouldn't worry about it so long as you don't have any intentions of selling the property with the furnishings in the future. If you do deprecate furnishings, then the cost bases would be the FMV of that furniture when the property was placed in service and available for rent. If purchased well before you placed it in the property, that cost basis would be significantly less than what you paid for it originally too. Especially if you used it before placing it in the rental. Also, if you used that furniture in another rental and depreciated it, you can't depreciate it again when placed in this rental. Overall, it's important to understand the difference between property improvements, repair expenses and maintenance expenses. Definitions are provided at the end of this post.
2) Additionally, can I claim expenses for property tax, insurance, and HOA association fees from the point I bought the rental property -- for the 2 months before I started advertising it to rent while I was getting the property ready to rent -- in this tax year?
No. Property taxes and mortgage interest are SCH A itemized deductions for the period of time starting on the date you purchased the property, to the date you placed the property in service and it was available for rent. Any other costs, including HOA fees are not deductible anywhere on your tax return for this aforementioned period of time.
Expenses incurred after the property was placed in service and available for rent are deductible on SCH E. (for example, yard maintenance). It does not matter if the property sat empty for several months either. If audited (highly unlikely, but never say impossible) it's up to you to prove the property was in service, available for rent and move-in ready from the date you claim.
do I have to add these expenses to capital depreciation?
You can't add them to anything. With the exception of property improvements (defined below) any and all costs incurred before the property was placed in service and available for rent the very first time, are just flat out not deductible and can't be claimed anywhere on your tax return.
3) I began advertising the property one month ago, and it has not rented out yet. My HOA is strict about shorter term rentals, and so I'm advertising it as a 6+ month furnished rental. It is taking longer to rent out furnished then if it was unfurnished.
No concern and not unexpected. Typically, furnished places rent sooner in college towns. So either you're not in a college town, or you're not advertising to the college crowd. But even in a college town, don't expect to get any bites until after Thanksgiving when students start looking for off campus housing for the upcoming spring semester that starts in January.
I'm concerned about being audited if I claim these legitimate yearly expenses (HOA fees, property tax, and insurance) when the house may stay vacant for three to four months a year while advertising until an intermediate (6+ month) renter moves into the furnished unit. Might this be a concern?
Nothing to be concerned or worried about, provided you do eventually get it rented. I've had rentals sit empty for months with no issues, as it took me that long to find a qualified renter that wasn't lying to me about their situation. (Yes, I do background checks for that very reason)
I'm good about keeping my expenses well documented. If I have a loss this year, can the loss be carried forward or deducted from my other passive income sources?
While not unheard of, it is not common for long term residential rental real estate to show a profit "on paper" at tax filing time. You rental losses that exceed your rental income are deductible from other "like-kind" passive income sources, if they actually have a profit. Basically, once your passive losses gets your taxable passive income to zero, that's it. Any excess is carried over to the next year. That means you can expect your carry over losses to increase with each passing year. You can't actually realize those losses until the tax year you sell the property. But alas, for every rule there is an exception.
If your AGI is below a certain threshold, then up to a maximum of $25K of the passive losses that exceed your passive income can be deducted from your other ordinary income. Then, anything left over gets carried over to the next year.
Now here's those definitions I mentioned above:
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence or 2nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter was contracted to move in, and/or "could" have moved in. That would be your "in service" date or after if you were asked for that. Vacant periods between renters do not count for actual days rented. Please see IRS Publication927 page 17 at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219175 Read the “Example” in the third column.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days *YOU* lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence, 2nd home, or any other personal use reasons after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.
Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.
Expenses for these types of costs are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria need to be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and its assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent for the very first time are not deductible.
Repair
Those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent for the very first time are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2-bedroom house into a 3-bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
